Question

A construction company is planning to bid on a building contract. The bid costs the company $1100. The probability that the bid is accepted is 0.1. If the bid is accepted, the company will make $91,000 minus the cost of the bid.

What is the expected value in this situation? Round to the nearest dollar.

Answer 1

Isn't expected value the sum of the products of the probability of each possible outcome multiplied by the value of that outcome?

So, if the bid costs $1100, and the chance that the bid is NOT accepted is 0.9, then that product is 0.9 x 1100 = -$990. It's negative because it is a cost, not an income.

The bid is accepted with chance 0.1, and if it is accepted, the company makes $91,000 but still spends the $1100 for the bid. So this product is 0.1 x (91,000 - 1100).

I think you then add those products together to get the overall expected value.

Answer 2

so woud the answer be -990 ?

Answer 3

That's just the first part... you still have to add the second part... 0.1*(91,000 - 1,100)

Answer 4

i got 8990! is that right?

Answer 5

That's right for the 2nd half... now add -990 + 8990 to get the overall expected value.

Answer 6

so the overall expected value is 8000?

Answer 7

that's what I think...

This means overall that the company should submit the bid, because they would "expect" to make money... of course, it doesn't guarantee anything, but given the probabilities, if they had hundreds or thousands of similar opportunities, over the long run, they would "expect" to make $8,000 per bid. They would miss out on 9 out of every 10 bids they submitted, costing them $1100 each time, but whenever they did get the job, they would make $91,000. Over time, it would average out to $8,000 per bid.

Answer 8

okay thank you so so much!

Answer 9

We roll a pair of dice. If the sum of the dice is 7, you pay me $26. If the sum is not 7, I pay you the number of dollars indicated by the sum of the dice. What is your expected value for the game?